What is centralized purchasing? Pros, cons, and when to use it

If your business lacks a centralized purchasing system, you could be spending a lot more money than necessary. Centralized purchasing consolidates a business's procurement activities into a single, cohesive system. This approach offers numerous advantages, including cost savings, improved compliance, and a more streamlined procurement process.

In this post, we'll discuss what centralized purchasing is, its benefits, and how to implement it.

What is centralized purchasing?

For example, a business may have multiple departments all separately buying the same supplies. Each one negotiates prices, manages inventory, and deals with suppliers on its own. This can lead to duplicate spending, varying prices, and inefficient use of resources.

With centralized purchasing, one dedicated team manages all buying for the entire business. They can negotiate contracts, set standard prices, and keep track of inventory for everyone. This approach ensures consistency, reduces costs, and makes the procurement process smoother.

What is an example of centralized purchasing?

An example of centralized procurement is a family-owned restaurant chain with five locations in the same city. The owner negotiates with local farmers and food distributors to supply all the restaurants.

This allows the business to obtain better pricing through volume discounts while ensuring consistent ingredient quality across all locations. The centralized system also simplifies operations by requiring only one person to maintain supplier relationships rather than having each restaurant manager handle their own purchasing.

How does centralized purchasing work?

The centralized purchasing workflow empowers businesses to make smarter spending decisions while maintaining cost control and compliance, and leveraging the business's collective buying power for maximum efficiency.

1. Need identification: A department identifies a purchasing need and confirms budget availability. Stakeholders determine specifications and requirements
2. Purchase requisition creation: The requesting department submits a purchase requisition. The department head or manager reviews and approves the requisition
3. Requisition submission: The approved requisition is submitted to the central purchasing department via established channels
4. Requisition review: The procurement team reviews the requisition, verifies the budget and prioritizes the request based on urgency and policies
5. Vendor selection: The purchasing team identifies vendors, initiates bidding if necessary, or uses pre-approved vendor contracts
6. Purchase order creation: The purchasing team generates a PO and assigns a tracking number. The purchase order is approved via established hierarchy.
7. Order placement and payment: The procurement department sends the PO to the selected vendor, confirms delivery, processes the invoice, and initiates payment

With these standardized steps, companies can reduce maverick spending, increase cost savings, and turn procurement into a valuable business partner that drives business success.

Benefits of centralized purchasing

Centralized purchasing offers numerous advantages that can transform procurement processes and boost the bottom line. These key benefits make this approach worth considering for businesses of all sizes.

• Cost savings: Increases buying power, allowing you to negotiate volume discounts and better terms with suppliers
• Reduced spending: Prevents maverick buying and keeps departments from unknowingly purchasing the same items
• Simplified ordering: Ensures employees across the business follow consistent procedures, reducing confusion and streamlining requisitions
• Better control and visibility: Provides comprehensive oversight of all company spending, making it easier to track budgets, identify trends, and ensure policy compliance
• Reduced overhead: Eliminates redundant purchasing activities across departments, decreasing administrative costs and reallocating staff to more strategic initiatives
• Improved supplier relationships: Fosters stronger partnerships, often resulting in better service levels, prioritized deliveries, and collaborative opportunities

While transitioning to centralized purchasing requires careful planning, the long-term benefits typically outweigh the initial investment. It also ensures the purchasing strategy aligns with overall business goals.

Limitations of centralized purchasing

While centralized purchasing offers numerous benefits, it's important to recognize that this approach isn't ideal for every business. Understanding its limitations helps you implement a system that works best for the business's unique needs.

• Longer turnaround and delivery times: It requires coordination and approval from the central procurement team. This can result in extended wait times.
• Lack of flexibility: It limits the ability to quickly adapt to market changes or unexpected events. This may lead to missed opportunities or delays in procurement activities.
• Lack of specialized expertise: The centralized procurement team may not have specialized knowledge about the diverse items needed by different departments. This can result in suboptimal purchasing decisions.
• Unsuitability for geographically separated companies: Businesses with locations across different regions may struggle with centralized models due to varying local needs, regulations, and supplier availability

Despite these challenges, you may be able to adapt a centralized purchasing strategy to accommodate limitations while still capturing the core benefits of this approach.

Centralized vs. decentralized purchasing

Centralized purchasing consolidates all buying decisions and processes through a single department or authority. Decentralized purchasing distributes purchasing power across multiple departments or business units that make independent buying decisions.

They have a few more distinct differences that can influence your decision of which one to use.

A centralized purchasing system can be ideal for large businesses with many departments to prevent duplicate spending. For example, every department needs the same office supplies, so it doesn't make sense for each department to purchase them separately. Instead, a volume discount can be negotiated with one vendor to supply all the departments.

Decentralized purchasing can also work for larger businesses. An example would be a big box store with locations in numerous cities. Each location must be able to purchase its own products because sales will vary from city to city, which means inventories will vary accordingly.

Many organizations also find success with hybrid models that combine elements of both approaches. For instance, a business might approve a specific vendor, but allow separate departments to make their own purchases from that vendor. This way, the vendor relationship remains steady, but departments can manage their own budgets and approvals.

When should you implement centralized purchasing?

Choosing centralized purchasing can maximize cost savings, standardization, and strategic supplier relationships. It's best used in these situations:

• Large-scale operations: When an organization needs to make high-volume purchases and can benefit from economies of scale and bulk discounts
• Standardization needs: When consistent quality, specifications, and processes are critical across the organization
• Specialized expertise required: When purchasing requires technical knowledge or market expertise that is best concentrated in dedicated procurement professionals
• Cost control focus: When strict budget management and spend visibility are priorities
• Limited supplier base: When the organization deals with a small number of strategic suppliers that serve multiple departments
• Risk management: When purchases involve complex contracts, compliance requirements, or high-value items that benefit from specialized oversight
• Organizational control: When leadership wants to maintain tight control over spending decisions and vendor relationships
• Shared resources: When multiple departments use the same supplies, equipment, or services

Centralized purchasing strategically aligns procurement activities with organizational goals, optimizes cost control, and enhances supplier management, while providing control over procurement processes across the business.

How to implement centralized purchasing

Transitioning to centralized purchasing requires careful planning and systematic implementation. Following this approach will help you navigate this change smoothly while minimizing disruption to daily operations.

1. Assess current procurement practices: Identify inefficiencies and redundancies to understand how centralization can resolve these issues
2. Assign a central procurement contact: Designate a department or person responsible for overseeing all procurement activities
3. Establish procurement policies: Create detailed policies and procedures for every aspect of procurement, including vendor selection, contract negotiation, purchase approvals, and payment processing
4. Select appropriate software: Find procurement software that fits your organization's requirements. Key features should include supplier management, contract management, and purchase order processing.
5. Implement the new process: Roll out the centralized procurement process, introducing the new policies and procedures. Launch the chosen procurement software and train all relevant personnel to ensure a smooth transition.
6. Communicate and train: Ensure all team members understand the new centralized process and their roles within it
7. Monitor and evaluate regularly: Continuously track performance using key performance indicators (KPIs). Regular monitoring allows you to assess effectiveness and make necessary adjustments.

With a thoughtful implementation strategy, your business can enjoy the benefits of streamlined procurement. Start with small wins, measure progress, and continually refine processes for optimal results.

Use Ramp to automate your procurement processes

Streamline your procurement processes with Ramp's comprehensive platform, designed to automate and optimize procurement workflows while reducing administrative burden across your business.

With Ramp, you can:

• Streamline your procurement requests: Effortlessly intake procurement requests using AI that captures every detail, document, and contract immediately
• Find savings opportunities: Gain complete visibility into spending to uncover savings on unused subscriptions, licenses, and memberships—eliminating unnecessary costs and reliance on outside accounting help
• Know your committed spend: Automatically generate purchase orders to get a clear line of sight into upcoming invoices

Explore Ramp Procurement to see how it can help you gain more control over your purchasing processes.